Educational Articles

Dow 30 Earnings: The Home Depot - Fiscal Third Quarter 2011

Matthew E. Spencer, CFA
| November 15, 2011

The Home Depot (HD – Free Home Depot Stock Report), the world's largest home-improvement retailer, has announced decent fiscal third-quarter (ended October 30th) results. Sales were $17.3 billion, up 4.4% from the year-earlier period and marginally ahead of our $17.2 billion forecast. Importantly, comparable-store sales rose 4.2% (3.8% at stores in the United States). Earnings, on the other hand, came in at $0.60 a share, up 13.2% year over year, but slightly shy of our above-consensus forecast of $0.63 (we had looked for more aggressive stock repurchases). Nonetheless, the retailer's numbers were solid, overall, though the stock’s price was little changed in early morning trading.

Sales were driven by a number of factors, including good results within the company's core categories, as well as storm-related sales. The densely populated East Coast was hit particularly hard this hurricane season, and suffered widespread flooding and wind damage. In terms of profitability, the gross margin expanded by about 15 basis points, and SG&A expenses as a percentage of sales fell by roughly 29 basis points. A lower share count also contributed to the earnings advance.

Looking ahead, the housing market will probably remain weak over the next several quarters, at least, and maintenance and repair projects will likely be stronger than large-ticket items and major renovations or remodelings. However, the company is executing well and operating efficiently, trends we expect to continue. All told, we've trimmed $0.02 from our fiscal 2011 share-net estimate, which now stands at $2.38 (up 15%-20% from the fiscal 2010 figure), in line with management's guidance. We continue to like these shares for risk-conscious investors with an eye on current income.

In other news, The Home Depot's board of directors has approved a 16% increase in the quarterly cash dividend, from $0.25 a share to $0.29. The first distribution in the new amount is scheduled to be made on December 15th to shareholders of record as of December 1st. Moreover, management stated that it is now aiming for a dividend payout ratio (dividends divided by net profits) of 50%, up from its previous forecast of 40%. The company is also working to enhance shareholder value through stock repurchases, and stated that excess cash will be used for this purpose. It plans to complete the remaining $6.8 billion of its current stock buyback authorization by the end of fiscal 2014.

It is difficult to discuss The Home Depot's quarterly results without taking a look at the performance of its chief competitor, Lowe's (LOW). Once again, The Home Depot outperformed its smaller rival. Lowe's bottom line was solid, as it earned $0.35 a share in the October period (excluding a $0.17 charge related to store closings and other discontinued projects), directly in line with our forecast and up 12.9% from the year-earlier tally. Comparable-store sales, however, were much weaker than at The Home Depot, rising a modest 0.7%. Lowe's is working to improve profitability and boost comps by closing 20 underperforming locations, opening fewer new stores, increasing supply chain efficiency, and bolstering its Internet presence. These efforts will likely not happen overnight, however, and we expect The Home Depot to be the relative outperformer in the near term.

About the Company:The Home Depot, Inc. operates a chain of 2,246 retail building supply/home improvement “warehouse'' stores across the United States and in Canada, Mexico, and China. The company's average store size is around 105,000 square feet indoor, plus 24,000 additional square feet in its garden centers. The Home Depot's product lines include building materials, lumber, floor/wall coverings, plumbing, heating, electrical, paint and furniture, seasonal and specialty items, and hardware and tools.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.